Can Stitch Fix Inc Stock Really Make a Comeback?

Stitch Fix still hasn't proven it's able to widen margins by scaling up

Stitch Fix Inc (NASDAQ:SFIX) dished out the same basic outcome in its second reported quarter as a publicly traded company as it did in its first one … unfortunately. After gaining nearly 7% during Monday’s regular trading, SFIX stock fell nearly 5% in after-hours trading following a revenue beat that was weighed down by a concerning shortfall of earnings estimates.

The company explained at the time that much of the added expense was related to the entry into new product categories, and those relatively higher costs would eventually dissipate. And, maybe they will. After seeing the strong selloff in response to the quarterly report though, traders seem to be questioning the company’s assessment from a quarter earlier.

SFIX Stock: Earnings Recap

For the quarter ending in January — its second fiscal quarter of 2018 — Stitch Fix turned $295.9 million worth of revenue, up 24% year-over-year, into a non-GAAP profit of 7-cents-per-share. Subtracting the impact of the recently enacted Tax Act, the company would have earned 2-cents-per-share. Analysts were calling for $291.2 million in sales and earnings of 6-cents-per-share of SFIX stock.

Gross profits of 43% and operating margins of 5.3% were sequentially down and up (respectively) from the previous quarter’s figures of 43.6% and 3.2%, leaving the question of rising shipping costs largely unanswered at a time when investors desperately need that data to justify the stock’s 50%+ gain since its November IPO.

The number of active customers grew by 588,000, to 2.5 million.

CEO Katrina Lake commented on last quarter’s results: “This quarter also marked the fourth consecutive quarter that we grew net revenue in the range of 25% year-over-year. In addition to strong momentum across our men’s and women’s categories, we’re excited about the potential of Extras, a new capability that allows us to serve more of our client’s wardrobe, while increasing incremental revenue.”

Is SFIX Creative, or Just Odd?

Stitch Fix is … a curious outlier in the increasingly melded world of online and offline retailing. The company curates clothing, and then selects certain styles of apparel with a particular customer’s given preferences in mind. For a $20 fee a stylist picks five garments, mails them to the individual, and that shopper returns any of the items he or she decides not to buy.

The $20 stylist fee is applied as a discount to any of the garments kept for purchase rather than sent back to the company.

The kicker: The more often the consumers requests a package and the more feedback that’s left about each piece, the better the stylist gets at selecting apparel. Lake described the shtick late last year, saying “The way we combine data science and humans is … unique, to deliver our kind of personalization, and I see [it] as a significant competitive advantage.”

Although Lake respects Amazon.com, Inc. (NASDAQ:AMZN), her message about personalization was aimed at the e-commerce giant, which doesn’t hand-pick apparel (at least not yet).

Kudos to the company for creativity, but algorithm-driven or not, it’s a labor intensive process … not to mention an expensive one. Shipping to and from would-be buyers is free, cutting into profits that are already paper thin. It’s not clear to what extent shipping costs were a burden last quarter, though that data might surface in Monday evening’s conference call.

The business model also relies heavily on the toughest of bridges to cross for consumers: letting someone else spend your money, even if there’s no obligation to purchase anything the stylist selects.

Nevertheless, Stitch Fix is profitable, and growing, despite the post-close pullback that is most likely in response to margin concerns. Clearly it’s striking some sort of chord with consumers that are increasingly inclined to outsource and automate many aspects of their lives.

The company didn’t offer any earnings guidance with its second quarter report, but it said it was looking for fiscal third-quarter sales of $300 million to $310 million and full-year revenue of between $1.19 billion to $1.22 billion. Analysts had been modeling income of 5-cents-per-share of SFIX stock and a top line of $300.29 million for the quarter currently underway. For the full year, the pros expect revenue of $1.2 billion and a profit of 20-cents-per-share. On both fronts, those figures would be better than year-ago numbers.

Looking Ahead for SFIX Stock

In an environment where so many personalized, labor-intensive services like Uber and Blue Apron Holdings Inc (NYSE:APRN) are bleeding money, it would be easy to dismiss Stitch Fix as yet-another outfit that developed an idea without thinking about its actual marketability and longevity. And to be fair, Stitch Fix still has plenty of work to do as it refines its operation; controlling shipping costs and widening margins should arguably one of its top priorities.

It doesn’t have to deal with the same trappings that business like Uber or Blue Apron do, however. Namely, its merchandise doesn’t spoil, and it’s not trying to manage a fleet of human drivers that have largely proven to be more of a liability than an asset.

On other hand, all too much like Blue Apron, interest in Stitch Fix’s service wanes rather quickly. An analysis done by The Information indicates that that usage of the clothing curation service by members falls between the first and second year. That means the company will not only have to spend heavily to acquire customers, but it will also have to keep spending heavily to keep them active.

Its future will be entirely dictated by how much personal work consumers really want to dedicate, and for how long. It’s still not clear where that line is.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.